BL Research Bureau

Amid the ongoing consumption slowdown, HUL Hindustan Unilever has managed to hold its head above the water, recording a volume growth of 5 per cent YoY in Q2 FY20. While the double digit volume growth recorded for the five quarters from December 2017 to December 2018 gave way to single digit growth of 7 per cent in three months ended March 2019, volume growth further deteriorated to 5 per cent in the April-June 2019 period. That the company has been able to maintain the same growth rate in volumes in the September 2019 quarter is a positive.

With HUL deriving 40-45 per cent revenues from rural sales, the slowdown in the rural economy has been impacting volumes in the last two or three quarters. According to HUL, rural sales, which were growing faster than urban earlier, grew only at par with urban in the June 2019 quarter and further deteriorated to 0.4 times urban sales in the July-September 2019 period.

Amid tepid rural demand, the focus on the urban consumer, lower raw material costs, price cuts in select categories such as cleansing and higher ad spends have helped keep demand afloat. As against the volume growth of 5 per cent, the company’s topline grew at 6.2 per cent to ₹9,708 crore.

Despite price cuts taken in the personal cleansing brands such as Lifebuoy and Lux, better product mix helped major segments such as home care and beauty & personal care show revenue growth of 5-9 per cent. The categories also benefited from launches such as Love & Care premium fabric wash, Pears Naturale Bodywash, and Pond’s Superlight gel.

Raw material cost as a percentage of sales came down to 48.1 per cent, from 49.5 per cent a year ago. Employee expenses also dropped a bit. These not only helped price cuts in select products but also enabled slightly higher advertising spends. As a percentage of sales, ad spends came in at 12.3 per cent in the quarter, up by 20 basis points vis-à-vis June 2018 quarter. Operating margins came in at 24.7 per cent, about 200 basis points higher than in the three months ended June 2018. Profits ( before exceptional items) grew by 20 per cent to Rs 1832 crore. Apart from strong operating performance, this growth was also aided by cut in corporate tax rate. Effective rate for the quarter stood at approximately 22 per cent, as against the statutory rate of 25.2 per cent.


Thanks to its resilience, the HUL stock has moved up by 30 per cent in the last year. It now trades at a rich PE of 69 times its trailing-12 month earnings. In the quarters to come, benefits from the corporate tax cuts could continue to give elbow room for the company to push up volumes through price cuts and ad spends. The company expects effective tax rate for FY20 at 27 per cent, compared with 30.5 per cent in FY19. The company expects effective tax rate for FY20 at 27 per cent, compared with 30.5 per cent in FY19.